Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Crude oil rally pause on Iran nuclear talks and gas price drop
Ole Hansen
Head of Commodity Strategy
Summary: A near non-stop rally in crude oil since September is showing its first signs of running out of steam, and while we do not expect a reversal, the market may enter a period of consolidation. The reasons behind the correction, apart from speculators scaling back long positions, are several and while some are directly linked to the oil market, others of equal importance involve China, Russia's Putin and the German government.
A near non-stop rally in crude oil since mid-September is showing some signs of running out of steam, and while we do not expect a reversal, the market may enter a period of consolidation before picking up steam as we head into yearend. The reasons behind the correction, apart from speculators scaling back long positions, are several and while some are directly linked to the oil market, others of equal importance involve China, Russia’s Putin and the German government.
Up until this week, the global energy market has been on fire with strong rallies in oil, gas and coal all creating a feedback loop that took prices of most fuels to multi-year or even record highs. Tight supplies of gas and coal in Europe and Asia leading to punitive and growth debilitating high prices have in recent weeks been one of the main reasons for crude oil’s additional price gains. The prospect of rising demand for diesel, heating oil and propane at the expense of gas has been estimated to lift global crude oil demand by up to one million barrels per day.
The reasons behind the lower crude oil price seen during the past 24 hours can be boiled down to these major developments:
- Iran and the EU agreed on Wednesday to restart nuclear negotiations which ultimately could lead to increased supply of oil. Before Trump reinstated sanctions in 2018 Iran produced around 3.8 million barrels per day, some 1.3 million barrels per day above current levels.
- EIA’s weekly inventory report showed a bigger-than-expected rise in crude oil stocks. While rising stocks are in line with seasonal expectations, the continued drop at Cushing, Oklahoma, did raise some concerns about availability at the important delivery hub for WTI crude oil futures.
- Lower gas prices after Putin promised increased gas supplies, perhaps in response to Germany’s Economy Ministry saying Nord Stream 2 certification would not pose a risk to EU’s security of supply. The Dutch first month TTF gas benchmark trades back below €80/MWh, but at 5X the five-year average, the market remains worried about another cold winter and whether a pick-up in Russian supplies will meet expectations.
- Tanking coal prices in China feeding through to the rest of the world after the government stepped up its efforts to secure power supplies by considering price limits along with a call on miners to lift production. Coking and thermal coal futures in China has lost 35% and 47% respectively during the past nine days.
The strong fundamental outlook supporting elevated prices of fossil fuels into 2022 has in our opinion not changed, but recent developments highlight the kind of volatility these markets can throw after us when both supply and demand uncertainties are at play. WTI, being the market with the strongest spot market fundamentals, given the mentioned stock slump at Cushing, has already managed to find support ahead of $80.50, the 21-day moving average while Brent's short-term technical outlook looks a bit more challenging, especially if gas-to-oil switching demand slow on continued gas and coal price weakness, and if Iran nuclear talks after several failed attempts should finally spring a positive surprise.
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